Again, apologise if this question has been asked before. How do I do an investment strategy for my smsf? What format or form does it take? I know broadly that an investment strategy basically spells out the asset allocation on how I want my super money to be invested in. If I adopt a growth approach, for example, then I may want to have cash up to 10%, direct shares paying franked dividend (say top ASX100) up to 50%, managed funds up to 20% (I know some people may argue that there is no real benefit for an smsf to invest in managed funds), listed investment companies (LICs) up to 10%, listed property trusts up to 10%. Does this constitute an investment strategy or do I need to add anything else? Any help would be much appreciated.

PS - The stock market is a bit buoyant at the moment and I am thinking of leaving the funds in cash for a bit longer. How do I cover this in an investment strategy?

mai

We received a standard one from the accountant who set up the fund. It is just very general, covering things like

the objective is to provide retirement oncome

investments will be made in a prudent manner

independent audit will be conducted

list of allowed investments

strategy - ie percentage in fixed interest, shares and property (I changed this from their original spread as it did not suit me)

investments will be controlled and reviewed by all trustees




If you email me using the link below, then I can send you back a copy. But please note that this will be copyright, so only use it as an example, don't copy it exactly.

When you do invest, remember to follow the rules. I have never forgotten on the old egoli, that when HIH collapsed, one of the posters noted that one third of his total SMSF money had been invested in it. I also know some people who trade penny dreadfuls through their SMSF and this is probably not a good idea. It is best to be squeaky clean and very conservative.



Cheers

LJ

Hello Mai,

I think you should keep it as vague as possible, eg: the fund will have cash assets between 1% and 80%, shares 1% to 90% etc.

You really do need flexibility to cover your ass...ets, if the markets tanks you may want to cash out, if it is a bull you may want to be overweight.

My accountants is OK with what I do BUT I only invest in T/Ds and the ASX200 stocks, it is mainly those who want to "be creative" that run foul of the ATO rules.

Macca

Thank you, Lainie Jean and Macca, for your replies.

We are very conservative in our investments, do not want to do anything foolish and run foul of the laws. We do not have enough money in the funds to do anything innovative or exotic such as buying artwork, properties or dealing in related party transactions. So, everything will be just cash, shares, managed funds.

Your suggestions are all very helpful and educational - all a steep learning curve for us, particularly me as I will be doing the leg work for our smsf to reduce the fees payable to accountant, auditor etc. I am aware that it is important to set ranges for the different asset classes to give flexibility to the implementation.

It is good that people are willing to share experience to help others (like me). So, thank you again.

Gone

Mai,
In addition to the advice already offered in response to your query could I suggest a few more sources of information.

(i) Section 52(1)(f) of SISA, the basic legislation on which the Australian super industry rests, spells out the legal requirements for an investment strategy in a SMSF. It says,

" Trustees must formulate and give effect to an investment strategy that has regard to the whole of the circumstances of the entity including, but not limited to, the following:

· the risk involved in making, holding and realising, and the likely return from, the entity's investments having regard to its objectives and its expected cash flow requirements;

· the composition of the entity's investments as a whole including the extent to which the investments are diverse or involve the entity in being exposed to risks from inadequate diversification;

· the liquidity of the entity's investments having regard to its expected cash flow requirements;

· the ability of the entity to discharge its existing and prospective liabilities; and

· if there are any reserves of the entity—to formulate and to give effect to a strategy for their prudential management, consistent with the entity's investment strategy and its capacity to discharge its liabilities (whether actual or contingent) as and when they fall due. "


(ii) As the ATO is the designated regulator of SMSFs it is important to look at what it says on the subject of investment strategies.The following location gives current ATO advice about investment strategies.
http://www.ato.gov.au/super/content.asp?doc=/content/19109.htm

(iii) The ATO carried out a study project on aspects of SMSF investment strategies a few years ago and the results of that are also worth considering if you have the time.

A brief report of the project is in an ATO newsletter at

http://www.ato.gov.au/superprofessional ... page=5#H10

(iv) Also, if you have not already seen it there was an earlier thread on this topic a couple of years ago on the forum.

Cheers,
Catron.

Hi there - you could consider the following as an indication - this was for a fund with a risk profile coming in as Balanced - whose members are in their 60's and don't want too much risk:: It is a cut and paste job, so I hope it copies OK :-


.

.

PURPOSE: The Trustees note that the xxxxx Superannuation Fund's investment strategy has been designed, and subsequent investment decisions will be made and implemented, with the sole purpose of providing retirement benefits to members.

INVESTMENT OBJECTIVES: The trustees have defined the xxxx Superannuation Fund's investment objectives as follows;
●- To enhance the value of members accumulated superannuation benefits, taking into account the risk associated with holding each asset, and the portfolio of assets collectively;
●- To achieve a targeted rate of return on fund assets of at least CPI + 2.5% per annum over rolling 3 year periods;
●- To provide positive investment returns in, on average, 6 years out of every 7 years;
●- To ensure sufficient liquidity to enable it to discharge existing and prospective liabilities to members, operating expenses and taxation liabilities as they fall due; and
●- to ensure all investment activities and decisions are made in accordance with relevant laws, rules and regulations so as to ensure the fund remains compliant at all times.


INVESTMENT STRATEGY: The investment strategy is the method by which the trustees plan to achieve the funds investment objectives. As such, the trustees have determined the strategy is to invest the funds assets in a variety of asset classes, including but not limited to the following;

●- Australian Equities: held either directly, ASX listed or otherwise, or indirectly, via managed funds, including master-trusts or similar structures, including internally geared funds and hedge funds;
● - International Equities: held either directly, stock exchange listed, or indirectly, via managed funds, including master-trusts or similar structures, including internally geared funds and hedge funds;

●- Cash and fixed interest: including but not limited to cash accounts, cash management trusts, term deposits, mortgage trust units, traded insurance policies, debentures, bonds, ASX listed income, debt and hybrid securities, and other cash like assets, held either directly or indirectly via managed funds, including master-trusts or similar structures;
●- Property: either held directly or indirectly via managed funds, including master-trusts or similar structures, trusts or syndicates, either listed or unlisted.


- The trustees have determined that the fund invest in the various asset classes as per the following table;

Asset classification .... Range === Benchmark

Cash & fixed Interest 20 – 50 % === 35 %
Property................ 0 – 30 % === 15 %
Australian Equities.. 20 – 50 % === 35 %
International Equities 0 – 25 % === 15 %
Other*.................... 0 – 10 % === 0 %

* This provides trustees the capacity to invest in assets other than those in the categories listed above as allowed by SISA.

The above ranges are typical allocations to each asset class however; trustees may vary allocations, above or below these ranges, at any time if satisfied that investment market & economic conditions warrant the change.

The trustees note that the following investment conditions are allowable;

●- Participation in dividend reinvestment programs, rights issues, buy backs and like investment opportunities;
●- The acquisition of stock exchange listed securities from members or related parties at market value;
●- The acquisition of works of art, including but not limited to paintings, sculptures, photography, sound recordings, plus artefacts and collectibles. Such assets fall into the ‘other’ assets classification;








INVESTMENT RISK: In developing, implementing and monitoring the funds investment strategy the Trustees consider the following categories of risk;

●- Inflation risk: The risk that the purchasing power of money may not keep pace with inflation, resulting in a poor real return on funds invested;
●- Diversification risk: The risk that a portfolio of assets is not adequately spread across various assets. Diversification of an investment portfolio is a deliberate strategy to help reduce risk through reducing the impact that volatility in one asset class, sector or market will have on your overall portfolio of assets;
●- Market risk: The possibility that movements in a market can cause an investment to decrease (as well as increase) in capital value;
●- Interest rate risk: The risk that an interest rate movement can affect the current market value (price) of an investment. This is particularly important for fixed yield, or coupon, assets given the inverse relationship between price and yield, as an interest rate rise will reduce the price of that instrument on the secondary market;
●- Liquidity risk: The risk associated with the ability to readily convert the assets to liquid assets, cash;
●- Credit risk: The risk that the business venture or institution holding your capital (e.g. a term deposit, bond or debenture issuer) may fail to pay interest or return your capital;
●- Timing risk: The possibility that a strategy of timing entry and exit from markets will expose you to greater short-term volatility;
●- Manager risk: The risk associated with a fund managers particular investment philosophy and ability to provide consistent investment returns. Performance expectations favour certain types of investment managers under certain economic conditions.

THE RISK-RETURN RELATIONSHIP: The Trustees have considered the following relationship characteristics between risk and returns;

●- investments vary in the amount of return they provide;
●- investments with the same expected return can vary greatly in the volatility of their returns;

●- some risks affect different investments differently;
●- some of the effects of risk can be removed by diversification;
●- some risks cannot be diversified away (eg movements in the general economic cycle which affect all investments);
●- the higher the return, the higher the levels of risk attached to the investment.

INVESTMENT RETURNS: The investment portfolio will typically comprise 50-70% growth assets, being shares & property.

Having considered the risks associated with investment markets, asset class, and the typical portfolio in its entirety, the trustees consider the risk profile should be defined as ‘balanced’. This mix is based on the fundamental principle of diversification. As each asset class is affected by different economic and investment environments, by diversifying across asset classes the trustees will ensure that investment performance is never fully exposed to the best or worst performing asset class. The trustees have considered the following historical data, since 1971, regarding a portfolio of this nature;

●- returns have varied from –17% pa to 37% pa in any one year;
●- at least one year of negative performance for every 10 years they remained invested; hence a 10% chance of a negative return each year;
●- The long term return expectations for a ‘balanced’ profile is 6.8% pa.

RISK MANAGEMENT: Prior to the inclusion in the funds investment portfolio, the merits of each investment will be considered by the trustees, including the level of risk assumed and the expected return. Similarly the portfolio risk and expected returns will be considered in its entirety.
- The widely held investment management philosophy of diversification, whereby available funds will be invested in an assortment of asset classes, will be used as the primary method to manage the volatility of investment returns. With liquidity risk in mind, the fund will invest in some growth assets to hedge against inflation. To manage currency risk, relating to international holdings, the fund may utilise investments with some level of in-built currency hedging. Interest rate risk will be managed by considering a combination of fixed and floating rate interest sensitive instruments.
- Where the use of professional investment managers are employed diversification between the various investment management styles, including value, style neutral and growth, will be considered.

LIQUIDITY: The trustees have structured the funds investment strategy in such a manner so as to provide sufficient liquidity to discharge its current and future liabilities.
Short term liabilities include lump sum payments to members, pension payments, taxation liabilities, and annual professional advice, administration and audit fees. Given the small number of members, and their close relationship, it is unlikely that the membership numbers will fall in the short term.
Longer term liabilities would include the payment of death benefits. Should liquid funds be required to affect a rollover or the payment of a death benefit, the vast majority of assets can be liquidated at relatively short notice.


INVESTMENT RESTRICTIONS: The Trustees note that, to protect superannuation fund members from being overly exposed to undue investment risk & to ensure that superannuation funds make investment decisions with the sole purpose of generating retirement benefits for members, the following investment restrictions are imposed by SISA;

The fund;
●- does not borrow; except in certain limited circumstances allowable by SISA;
●- does not hold any assets with a charge over them;
●- does not loan money to members or related parties;
●- does not acquire assets from members or related parties of the fund, other than listed securities or business real property acquired at market value;
●- does not conduct a business; and
●- must conduct all transactions on an arm’s length basis.

END

Don't take this as gospel, because it is not meant to be. If you are a bit more aggressive, the % range for various asset classes could be increased. (shares up to 75% for eg.). Main thing is to be inclusive, not exclusive.

And the coming thing, in terms of tax strategies, is going to be treatment of reserves. May need a paragraph on that as well

Hi benthonic, Thank You, for a sample of an investment strategy for a smsf. It is a great help - together with a sample from LainieJean. Hubby actually was working on ours last night - this will give him some more leads. Again, THANKS to all forum contributors for your help. Much appreciated.

My strategy was extremely brief:

10% cash, 90% shares, 0% property, 0% other

Objective: high return

and that was it. This got through the paperwork system OK and has been audited.

Cheers.

came across this (esuper)

Investment Objectives and Strategy

Investment Objectives

The objective of the Fund is to maximise benefits for the purposes of providing benefits to members in accordance with Trust Deed governing the Fund’s operations. The investment objectives which have been considered by the Trustees of the Fund in formulating the investment strategy include:

- The Trustee will at all time act prudently to pursue the maximum rate of return possible, subject to acceptable risk parameters, and maintenance of whatever diversification that can be achieved with the available assets.
- The Trustee will take into account the number of years to retirement of the members when considering investment options.
- The Trustee will establish a tolerance within the fund to short term fluctuations in income and capital values given the profile of the member’s ages.
- The Trustees will have proper regard to the risks associated with the investments given the funds objectives and cash flow requirements.
- The Trustee will invest to ensure sufficient liquidity is retained within the Fund to meet benefit payments and other liabilities as they fall due.
- The Trustees before investing in a particular asset will have proper regard to the balance between the risk and return, so as to maximize the rate of return on member’s entitlements subject to an appropriate level of risk.


Investment Review

The Investment Objectives of the Fund will be reviewed annually and at such other times as a significant event occurs which affects the Fund.


Investment Strategy

With regard to the investment objectives outlined above the Trustees have adopted to pursue an Investment Strategy aimed at accumulating over the long term some or all of the following asset classes:

- Property Investment where there is no borrowing made by the SMSF;
- Property Investment where there is a borrowing made by the SMSF;
- ASX Listed Securities;
- ASX Listed and Exchange Traded Options;
- ASX Listed Warrants;
- CFDs;
- Australian and International Managed Funds
- Cash;
- Term Deposits;
- Other Cash Investments including, bonds cash management trusts and appropriate derivative products;
- Physical Metals
- Other Assets that the Trustee considers appropriate to the extent permitted by the Trust Deed and Superannuation Regulations..


Percentage Investment Range

The Trustees consider that no specific percentage range for each of the above asset classes should be adopted but that each asset class should be considered on its own investment merits having regard to an appropriate degree of diversification.

Single Asset Investment Strategy

A single asset strategy may be adopted by the Fund if the asset proposed to be invested in is considered by the Trustee to satisfy a core purpose of the Fund’s investment objectives and provided that the Trustee is satisfied that no other benefit (excepting incidental benefits) is conferred upon members or associated parties.

Arms Length Basis

All investments by the Fund shall be on an arms length basis and will be acquired, maintained or disposed of on commercial terms at market rates of returns.

Maximising Member Returns

The Trustee considers that this Investment Strategy will fulfill the principal objective of maximising member returns having regard to risk and is consistent with the investment objectives of the Fund.
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but ultimately, only a lawyer will be happy

Any possibility that it could be simplified along the lines off:

"During a member's working life lawfully accumulate as much as possible in the way of income producing assets to assist with the funding of his or her retirement."

Nah. That just makes things too simple and we cannot allow that.

how succinct. Judd; an economical way of stating the obvious, rather that the convoluted ambiguity that ended up saying nothing.

Sorry, mate you have got no chance. Gobbledy-gook wins every time.

(Grampians are kind of special, but a bit burnt out, right now. Also our progress deeper into the park was thwarted by a P-Plater getting hit by a car, while doing a 3-pt turn on a blind corner. we had to wait till they cut them out. That spoilt the day)